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Pros and cons of SBA loans

A young couple smiles in a commercial kitchen.
Morsa Images/Getty Images

The Small Business Administration is a government agency that works to support small business owners and entrepreneurs in the U.S. One way they do this is through offering SBA loans. 

SBA loans aim to make it easier for small businesses to get the funding they need to launch and operate. In 2021, the SBA provided more than 61,000 loans, totaling $44.8 billion in funding. 

But SBA loans, with their lengthy approval process, aren’t for every business. Like all business funding options, there are pros and cons to using SBA loans. We’ve outlined the top reasons you might want to get one and the reasons you might not. 

What is an SBA loan?

SBA loans provide small business owners with a low-interest, government-backed loan to help fund their businesses. These loans are administered by third-party lenders equipped with training and funding through the SBA. 

There are a few different types of loans business owners can apply for. All loan types require that the business is for-profit and meets SBA size requirements. The right loan type for each business depends on its needs, size and purpose.

  • 7(a) loans: This loan program is the SBA’s most popular. The maximum loan amount for a 7(a) loan is $5 million, and the funds can be used for short and long-term working capital, refinancing current business debt and purchasing furniture, fixture and supplies. This is the best SBA loan option for purchasing real estate. 

  • CDC/504 loans: 504 loans are administered by Certified Development Companies. CDCs are community-based partner organizations empowered by the SBA to provide these loans. The maximum loan amount for a 504 loan is typically $5 million, but it can be up to $5.5 million in some cases. Loan funds can be used for fixed assets that promote job creation and business growth. 

  • Microloans: As the name implies, microloans provide smaller chunks of funding for businesses. Microloans are provided in amounts of $50,000 or less. They are administered by non-profit community organizations. Funds can be used for a variety of reasons to rebuild, reopen, repair, enhance or improve small businesses. 

While each SBA loan type differs in its requirements and purpose, they all exist to empower U.S. small businesses. 

SBA loan pros

There are a lot of reasons SBA loans are great. They offer a favorable funding option for many small businesses without the extra costs carried by some other business funding options. These government business loans can be the right next step for many business owners. Here’s why you might want one. 

Your loan is government-backed

Having a backed loan means the SBA will shoulder the debt if you have to default on the loan. This allows the lender to get back a portion of the loan, even if you are unable to make the payments. This kind of backing gives lenders more incentive to lend to your business than they might have to lend to you with a conventional business loan that isn’t government-backed. 

Favorable interest rates

Because SBA loans are backed by the government, they also typically have lower interest rates than other small business loans. You can have a fixed rate or a variable rate; rates are set based on the Prime rate, LIBOR or the SBA optional peg rate. 

Interest rates vary by loan type and lender. You can find the exact rates expected for SBA loans currently by speaking to a local SBA lender. 

Longer repayment terms

With SBA loans, you have longer to pay off the loan than you do with most business loans. Typically, you have up to 10 years to pay off a conventional business loan. With an SBA loan, you may have up to 25 years to pay off your loan. You can adjust those terms, too, as the purpose is to cater to the needs of the business rather than get paid back as quickly as possible. 

Extra support available throughout the life of the loan

Multiple SBA loan types include support for the business until the loan is repaid. The SBA provides counseling and education to help you start and run your business. The SBA also has business resource centers focused on specific types of business owners, including women-owned businesses and veteran-owned businesses

Variety of loan types available

The SBA offers loan types that cater to different business needs. They also have some temporary loan programs designed to address specific challenges. 

For example, they offered several types of business funding for COVID relief. And until Sept. 30, 2024, the SBA is offering a Community Advantage Loan to help small businesses in underserved markets. Small business owners can likely find an SBA loan that will fit their needs. 

SBA loan cons

SBA loans aren’t perfect, and they won’t be the right funding source for every business owner. Here are some of the key disadvantages of using an SBA loan. 

You have to use other funding first

If you have personal assets or money that you can use, the SBA requires that you use it before applying for one of their loans. Therefore, SBA loans won’t work for you if you have personal equity or other funding options that you haven’t used for the business yet. 

Stacks of paperwork

The list of documents required to apply for an SBA loan is extensive. You will fill out forms with your and the business’s financial information. You will also need to provide a business plan, resume, business financial statements, previous loan applications and your business license, just to name a few. 

Your lender will provide you with a whole list of documents needed, but know that you will be doing a lot of paperwork to apply for an SBA loan. Plus, you may be required to provide additional documents once you apply. 

Long waiting period

The SBA approval timeline varies by loan type. You could wait anywhere from 36 hours to 90 days for your loan application to process, depending on the loan type and the lender. Actually receiving money takes longer still.

The longer end of this time frame is quite long compared to other business loan options. With other loan options, you can get funding as quickly as a few days after applying. Bank loans may take a month or two, but even they don’t typically take 90 days to fund.

You can’t use the money for everything

Each SBA loan specifies how you may spend the money. For example, the 7(a) loan is the best SBA loan option for purchasing real estate. But sometimes in business, you plan to fund one need only to realize that you need funding more for something else. Sticking to the strict guidelines for SBA loan funds may prevent you from necessary pivots on how you use the funding. 

Collateral may be required

Even though SBA loans are guaranteed, some loans still require that you provide collateral. For example, with a 7(a) loan over $350,000, the SBA requires that lenders take collateral on the loan. The amount of collateral may be less than other loan types, but it is still a requirement that business owners will need to consider. 

SBA loan alternatives

If you decide you want to explore other funding options, there are a variety of funding alternatives. Consider these options if you don’t want to apply for an SBA loan:

  • Personal equity: If you have money squirreled away, consider using it to fund your business. Of course, this option does mean risking personal assets should your business suffer.

  • Venture capital: If you’ve seen the show Shark Tank, you have an idea of how venture capital works. You can look for individual private investors or venture capital firms and present your business in hopes of getting an investment. 

  • Conventional business loans: Similar to SBA loans are conventional loans. Typically funded by banks or online lending institutions, conventional business loans usually have less favorable terms than SBA loans, but they can still be a good funding option for small businesses. 

  • Business credit card: Business credit cards’ requirements aren’t quite as strict as they are to apply for a loan. Consider this option if you just need a small amount of funds that you will earn back quickly. 

  • Crowdfunding: Platforms like Kickstarter and GoFundMe have made crowdfunding a popular option. As a business owner, you can post your idea and ask individuals to donate a small amount in hopes that you will raise the funds you need for your business. 

Funding a business is no easy endeavor. It’s always a good idea to consider all your options. Even if you apply for an SBA loan, also investigating some of these options could help you get the funding you need. 

The bottom line

Like every funding option, SBA loans have good and bad sides. As you fund your business, think about which options would be the most helpful. While there is no perfect funding option, SBA loans’ favorable terms and government backing make them a great choice for many small businesses.